The Failure of Modinomics

It has been close to one year since the government announced its decision to discontinue the legal tender status of Rs. 500 and Rs. 1000 notes (85% of the currency by value) followed by the GST rollout in July this year. The so called massive disruption caused by the massive overhauling that the money market has gone through and the hasty and poor implementation of Goods and Services tax (GST) are pushing the economy in a slowdown mode. While the demonetization narrative was structured as a battle between the “Good and the Evil”, by the Prime Minister, but the mind boggling figures would give us an idea of the monumental nature of the task that the Government of India had undertaken. The severe cash crunch that resulted in with demonetization caused colossal inconveniences to the people who were thus far totally dependent on cash transactions. As economy was yet to recover from demonetization pain, the rollout of GST was too big a second disruption that clogged online payment system, decline returns and makes the filing of returns both tedious and difficult for businesses and corporate.
As the state of economy is much in discussion now a days, much of the criticism seems centered on the effects of demonetization and its failure to curb black money and the teething troubles of GST – the million dollar question arises here, when went wrong with Modinomics? To begin with, let me tell you honestly that most of the economists and corporates are of the view that large part of the blame has to lie with the government and its policies. Laconically, policies that should not have been adopted were adopted (Demonetization) without proper planning, thereby creating uncertainty which shook the investors’ confidence. In a similar vein, policies that should have been adopted (plug avenues of tax evasion) but were not. Therefore, this problem of omission and commission has played havoc with businesses, sunk many of them and produced countless millions who have lost their jobs.
India which had the mantle of world’s largest growing economy has now slipped below China in terms of growth. India’s GDP growth tumbled to 5.7% (7.9% in the corresponding period of previous year) in the April-June quarter of 2017, which is assumed to the lowest in 13 quarters. As per experts and analysts, the numbers were disappointing which bore the direct brunt of demonetization and GST destocking. The sectors that took the worst hit after the cash squeeze were manufacturing (1.2% Vs 10.7% a year ago) , followed by construction (2% Vs 3.1% a year ago) and agriculture (2% Vs 4.9% a year ago) which is hurting despite favourable weather and good rainfall last year. Similarly, the industrial capacity utilization is slipping down to 71% in the current year, from 75% a year ago. Besides this, the most worrisome is gross fixed capital formation, a reflection of investments made, slipped from 31% to 29.6% in the April-June quarter of 2017. The picture is not rosy, if we compare the investment numbers of last 3 quarters with the preceding10 quarters which reveals that there is almost zero incremental investment happening now. With an NPA overhang, corporates are wary and lack appetite to take risks. The informal sector which plays a disproportionate role (produces 45% of output) in the economy is also primarily cash reliant and bore the brunt of demonetization. The not so good news is fiscal deficit touched 92% of its budget estimates by July this year. Similarly, the RBI survey for June 2017 is a wake-up call for Narendra Modi government which shows consumer confidence at lowest point in last three years.
There are good numbers of statements that have come in the backdrop of India’s slowest economic growth in the last three years. Noted economist and former Prime Minister of India ,Dr. Manmohan Singh has put the blame on demonetization and GST for the current economic slowdown and said: “the withdrawal of 86% of currency plus GST, because it has been put on practice in haste, there are lots of glitches which are now coming out. These are bound to affect the GDP growth adversely.” Former RBI governor, Raguram Rajan showed a mirror to government and said, the entire purpose of demonetization stood defeated after the decision failed to achieve its objective of curbing black money. Yashwant Sinha , former Finance Minister of the Vajpayee government, provided perhaps the best one sentence summary about the gloomy state of the economy: “Private investment has shrunk as never before in the two decades, industry production has all but collapsed, agriculture is in distress, construction industry a big employer of the workforce is in doldrums, exports have dwindled, sector after sector of the economy is in distress, demonetization has proved to be an unmitigated economic disaster, and badly & poorly implemented GST has played havoc with businesses.”
Lamenting the failure of demonetization and criticizing the disastrous implementation of GST, various industry experts including India Inc, large corporates, top heavyweight inside the BJP too, are blaming the government for the current slowdown and bleak growth outlook. To quote India Inc, demonetization and GST have hit their businesses and in turn put more pressure on the overall sales. Hindustan Unilever Limited (HUL) MD, Sanjiv Mehta also blamed that the demonetization and GST continue to haunt the rural markets and added that the overall segment has fallen to single digit growth. The blame game is also supported by the Executive Chairman of Larsen and Toubro’s group AM Naik who argued that India would have advanced at a much faster pace of 7% but fell behind the curve due to note ban and the implementation of indirect tax reform.
To make an honest analysis and to analyze the present situation in a practical manner, frankly speaking, launching of demonetization and GST simultaneously did not prove to be a very healthy decision for the Indian economy. Laconically, the twin initiatives had no impact whatsoever on the economy which is surprising, given the widely reported experiences of the closings of small factories and businesses, enormous job losses and postponement of projects. Also, concerns on the growth dynamics do prevail, led by subdued consumption and investment demand, compounded by twin balance sheet problems and a strain on state finances. While these facts may change over time, but given the difference in the nature and incidence of benefits and costs, each rupee of cost should be given a much higher weight than each rupee of benefit. To quote Maitreesh Ghatak, Professor of Economics at the London School of Economics, Modinomics has turned into muddlenomics, which needs serious “modification” and for once, the pun is desperately not intended.

—The author is an Assistant Professor at Government Degree College, Tra. He can be reached at: [email protected]

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